Real estate sector amnesty scheme aimed at legitimising black money

ISLAMABAD: In an apparent wish to have an amnesty scheme for investors in the real estate sector, builders and developers have enquired from the Federal Board of Revenue (FBR) whether buyers of immovable properties can pay the tax without declaring their sources of income.

In a letter sent to FBR, regarding anomalies in valuation of immovable properties, the Association of Builders and Developers of Pakistan (ABAD) has inquired the board that in case the buyers pay 3 per cent tax against the actual value of property, more than that of the FBR’s or DC’s set value, would that allow them to conceal their sources of income or not.

The official sources at FBR claimed that the board cannot compromise on the investigation of source of income. “In case the source of income is not asked to collect the maximum tax, it will be a kind of amnesty to the black money holders, who usually try to invest in properties,” said the sources.

Pakistan Tehrik-e-Insaf MNA Asad Umar during a recently held meeting of National Assembly’s Standing Committee on Finance had said that though the issues related to the real sector could be addressed by FBR and other authorities concerned, however, relaxation to dealers of black money should not be allowed through any system.

According to the response of FBR to suggestions of ABAD and Pakistan Real Estate Investment Forum (PREIF), as per documents available with Pakistan Today, ABAD has put forward a situation where the buyer registers the property at DC value at Rs 100 whereas the FBR value is Rs 200 but the actual purchase value is Rs 210 and shows the value of Rs 210 to FBR. ABAD asked whether FBR will charge 3 per cent tax if the buyer is able and ready to declare his sources.

In another case ABAD asked if the buyer registers property at Rs 100 and shows purchase to FBR at Rs 210, will the buyer be able to pay 3 per cent tax without his sources being investigated?

ABAD has pointed out that in Karachi the valuation of same size residential, commercial and industrial open and built-up properties is different whereas in Lahore there is no difference between the valuation of open and built-up immovable properties.

Referring to various anomalies in the value of properties in different cities, ABAD proposed a parliamentary committee consisting of FBR representatives and stakeholders to take up issues of anomalies and fix property valuation on the basis of average 30 per cent of market value according to the agreed formula.

However, FBR, in its response, stated that rates for immovable properties were notified in August 2016 and before notifying the rates, the fair market value of all the areas was determined. Thereafter, the FBR rates were fixed after consultation with the stakeholders. The overall average of FBR rates was fixed at a certain percentage of the fair market value with the intention to take the FBR rates equal to the fair market value gradually over a reasonable period of time. Subsequently, various representations and complaints were received regarding anomalies in valuation tables of FBR and it was reported that FBR rates in some areas are higher than the approximate overall average percentage of the fair market value and in some areas even higher than 100 per cent of the fair market value. In this regard, the FBR also held various meetings with the stakeholders to remove the anomalies.

The anomalies pointed out were of two main categories; (i) the FBR rate in some areas is fixed much higher than the overall average percentage of the fair market value and in some cases even higher than the fair market value; (ii) the FBR rate as percentage of fair market value is higher when compared with a similar comparable location.

Accordingly, the FBR rates have been revised to remove the anomalies. The areas where anomalies were removed included the areas where PREIF also pointed out anomalies, such as DHA City Karachi, SITE Industrial Area and Anmol Cooperative Housing Society.

Regarding the first issue raised by ABAD and keeping in view the hypothetical values are given by ABAD, if the buyer registers the property at the actual price of Rs 210, then tax at 3 per cent under section 236W is not applicable. If, the buyer registers the property at Rs 100 being less than FBR value of Rs 200 or actual value of Rs 210 then under section 236W tax at 3 per cent will be collected on FBR’s and DC rate’s differential amount, i.e. Rs 200 – Rs 100 = Rs 100.

In accordance with the explanation (2) at section 111(4) of the Income Tax Ordinance, 2001 where a person has paid tax under section 236W, the person shall be entitled to incorporate in his books of accounts the amount whereon 3 per cent tax was paid in tangible form. As for the second issue raised by ABAD, the FBR issued the open and built-up valuation of residential, commercial and industrial properties in Karachi while considering the valuation of immovable properties by the local authority in Karachi.

In Karachi, the Board of Revenue, Sindh had issued valuation of open and built-up properties separately whereas in rest of the areas the local authorities had not made such differentiation. However, the FBR is considering a separate valuation of built-up properties in rest of the areas as well.

With respect to third issue raised by ABAD, it was stated that anomalies were found in many cities of Pakistan but no specific anomaly has been pointed out. However, the FBR is amenable to consider if any specific anomaly is pointed out, where the FBR rate is higher than the overall average percentage of fair market value or where FBR rate is higher than any comparable location. ABAD has submitted a proposal to set up a committee for removal of anomalies. However, under the provision of section 68(4) of the Income Tax Ordinance, 2001, the Board was empowered to determine the fair market value of an immovable property, which was accordingly done in the urban areas by Board in August 2016.